Features sacrificed with the adoption of IFRS
Discuss about the Measuring Qualitative Characteristics Analysis.
Company can survive in the market and the industry only when it satisfies the needs and the requirements of the investors. The investors are the persons who make the business of the company to run as it creates the reputation in the market of the company. It is worthy to mention that it’s not only the company which considers the interest of the investors but also the government considers their interest and that is why the government has come up with the new auditing standard on Auditing and new disclosure scheme after the global crisis that has happened in the year of 2007. In this report, the financial reporting has been discussed in detail with regard to the features and how the same will cater to the needs of the investors.
The report has been divided into five broad sections. First section is related to the thorough analysis of the quotations given by some persons and in what ways the same has led to the belief that the financial reporting being made by the companies has lost their features which maintains its quality. The second section has dealt with the deep understanding as to what are the factors which will avoid the government agencies to formulate the regulations and the same has been detailed with reference to the various theories and majorly of the regulations. The third section has been from the area of the United States reporting practices and deals with the deep analysis of the restriction made by the United States Financial Accounting Standards Board. The fourth section has then helped in analyzing the various reasons which have discouraged the directors from following the fair value method of valuation of the noncurrent assets and the corresponding effect that the investors will face from it has been mentioned. The fifth and the last section is related to the concluding paragraph of the overall report and ends with the appropriate recommendation for improving the quality of the financial reporting.
With the introduction of the IFRS, many investors and the company top most officials have expressed different views as to how the IFRS framework will work and how the companies and the investors will react to it and so on. All these have been explained only in relation to the financial statements of the company and majorly about their quality of the reporting.
Government regulations and theories of regulation
With respect to the different understandings of the persons with their quotes, following has been identified as the features which have been sacrificed:
- First feature that has been sacrificed is the understandability. It is related to the fact that with the adoption of the IFRS the investors will not be able to understand the financial statements of the company and which in turn will make them to take the incorrect decision. They have to be trained in order to know the ins and outs of the company in relation to the financial reporting.
- It has also been mentioned that the investor have to rely on the investor report of the company and the details if any given by the company along with the briefings of the numbers. It means that the feature of the reliability has also been sacrificed.
Thus, the feature of the understandability and the reliability has been seems to be sacrificed with the adoption of the IFRS (Beest, 2012).
But if the conceptual framework in the financial reporting is considered then it cannot be said that the above are consistent with the central objective of financial reporting and hence IFRS maintains the quality of the financial reporting.
The statement that the government has decided not to provide the regulation as detailed by the inquiry submitted in the year of 2001 has been the very debatable area which has created the wave in the industry and the market.
The statement has been made by the government in regard with the following theories which have been mentioned as the theories of regulation.
- The first premise of the statement is the theory of the public interest. It provides that the regulations made by the government will fail because of the changing market conditions. The major example of the market conditions is of the monopoly under which the demand and the supply do not function and the regulation thereon also does not perform well. Second is the situation where there has been the case of the worse competition (Hertog, 2012).
- The second premise is the theory of the capture which in future becomes useless and starts serving the interest of those persons who have been originally considers as the most affected persons of the regulation.
- The third premise has been on the theory of economic interest of the representative groups. This theory has detailed that the regulations are made by those people who are the representative groups of the industry for which the regulation is being made and in that case the interest of that particular representative groups will only be considered and hence the purpose of making the regulation by the government will fails as it works on their own.
In the Corporate financial statements of the United States, it has been restricted to follow the fair value model and has been made compulsory to follow the impairment of the assets. This statement and the regulation have led to the following implications:
- The first implication which has been inferred is that there will be the loss of comparability feature in the financial reporting. It is due to the fact that the fair value model has been prescribed by the IFRS and if the same has not been followed by the company operating in the United States then the financial statements of those companies cannot be compared and hence it will not be possible to implement the IFRS across the globe and have the comparability feature working across all the companies operating in the World.
- Apart from the comparability, the reliability and the relevancy of the financial information has also been implied from the non adoption of the fair value method. It is because of the fact that the investors will not feel the financial information relevant and reliable and hence will not be able take an effective decision.
- The next implication is identified as the relevant and is related to the charging of the impairment amount to the assets. The impairment is very necessary in the current scenario because of the changing market conditions and the regulatory mechanisms which lead to the sudden reduction in the value of the assets of the company.
- Revaluation model for the valuation of the property plant and equipment has not been still adopted by the directors of the organization. It is because of the following reasons:
- There always been the changes in the market conditions on the frequent basis. These changes have led to the companies to wipe off their assets as standing in the balance sheet on one day. This can majorly affect not only the financial position and the net worth of the company but also affects the decision of the investor that they have taken earlier.
- Second factor is related with the incapability of the directors of the organization to have the identification of the fair value of the asset because of the fact that many times the market value of then asset is not made available due to the severe market conditions.
- Third factor that has motivated the directors is that the historical cost will be more reliable than the fair value. It is due to the fact that the directors at times to serve their own group interest manipulate the market value and thus is less reliable (Seng, 2015).
- Last factor that has motivated the directors is the gross reduction in the value of the property plant and equipment which in turn will reduce the net worth of the company and also will result in the loss of wealth of the stakeholders of the company.
Thus, in this manner the directors have the motivation to adopt the cost model only.
- The company will not be able take management decision for the replacement of the asset and other related decision. As such decision ignores the historical cost which has been incurred in the past.
- The company’s financial statements will not be able to be compared with the financial statements of the other entities (Christensen, 2012).
- The effect on the earnings of the shareholder of the company will be very good. It is because by following the revaluation model, the earning price and net asset value per share can be decreased with drastic amount due to change in the market conditions which otherwise will not be there if the cost model has been followed. Thus, the shareholders wealth will not be affected.
Conclusion
Throughout the report, the investors and the market mechanisms have been revolved and have been explained as to how the same can affect the presentation of the financial statements and thus can have the material impact on the financial reporting of the company. Three major pillar of the financial reporting are market, investors, regulators and the company. If any of this is taken out then the financial reporting with good quality cannot be achieved. Four tasks have been discussed. First task concludes that the quotations of the persons are not reliable and relevant. Second task concludes that the government shall not made regulation due to market mechanisms. The third task concludes that the United States shall adopt the IFRS framework at its best otherwise the financial reporting made by the companies operating in the United States will lack the comparability across the globe. The fourth task has concluded with the cost model as the best way for the valuation of the noncurrent assets of the company as it will not affect the earnings of the shareholder. In order to summarize, the report has detailed the importance of the financial reporting and regulations and that too keeping in view the interest of the investors.
With this conclusion, it is strongly recommended that the financial reporting quality shall be maintained by the companies in every manner and the rules and regulations shall be formulated by the government.
References
Beest, F.V., (2012) , “Quality of Financial Reporting: measuring qualitative characteristics”, Accounting review, 205(4), 22-26
Christensen H, (2012), “ Does Fair Value Accounting for the Non financial assets pass the market test”, Journal of Booth School of Business, 45(2), 8-22.
Hertog J, (2012), “General Theories of Regulation”, Journal of Economic Literature, 111(2), 142-149
Seng D, (2015), “Managerial Incentives behind the Fixed Asset Revaluations : Evidence from New Zealand Firm”, Department of Business : Working papers, 3(5), 44-67
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